The rise in sovereign bond yields, the most significant in decades, has been steering the markets since late September, with two clear epicentres: the USA and France. This morning, Erick Muller, product and investment strategy director at Muzinich, spoke on both topics during the presentation of their year-end outlook and looking ahead to 2027, downplaying its impact on the markets for now.
On September 29, the US 10-year bond yield reached 5.293%, its highest level since 2007. Meanwhile, the French OAT in the same maturity has risen from 4.22% in early September to 5% this past week, the highest reference in 25 years. In Muller's opinion, despite the toll that the markets have paid in the form of volatility, the out-of-control US debt is not as severe as it may seem. “We are used to very low volatility, so when there is a movement in spreads of 20 or 30 basis points, it seems like a large spread, but over time, it is not. Spreads in the 'investment grade' segment, for example, are returning to the 50th percentile,” he explains.
In this regard, the Fed's main priority at present is to maintain credibility in the convergence of inflation towards the 2% target, which has not been reached for five years, and to implement two or three additional rate hikes until a balanced level is achieved. “I don't care when they will occur, because I know they will. If not in October, it will be in December, or early 2027. There is no other option,” he explains.
Regarding the situation of French debt, the most serious within the Eurozone in this new episode of rising yields, the Muzinich expert does not see an imminent crisis, but rather a situation that is “uncomfortable and very noisy due to a very unfavourable political calendar.” With a public deficit of 5.4% projected for 2026, well above the 3% required by the EU, public debt around 119.3% of GDP, a record since 1978, political instability, and interest payment expenditure that has risen from €70 billion to €100 billion in three years, resolving the underlying issue in France will take time. “We are in a transitional phase, where the campaign for the presidential elections of 2027 has just begun and we have not yet seen the moment when the candidates come together to offer a clear vision,” says Muller.
For now, the Governor of the Bank of France, Emmanuel Moulin, has ruled out any intervention by the ECB: "France should not look for solutions in Frankfurt; the solutions are at home," he said. According to Muller, with the current debt spreads, the circumstances do not exist for the ECB to intervene. “We would probably have to consider much wider spreads before a systemic risk, a disordered market, or an unbalanced market arises,” he explains.
If the central bank ultimately had to act, its toolbox today is much more extensive than in 2012. It would probably not start with long-term bond purchases (PEPP, PSPP), because unwinding them takes too many years. It would start with the OMT, which only buys short-term bonds and is easier to enter and exit. The problem is that the OMT requires France to formally request help from the ESM and present a plan for cuts. Therefore, the TPI would be the most flexible solution, as it does not require that bailout. This ECB instrument, created in 2022, is used to buy bonds of a country if its spread skyrockets due to panic and not due to mismanagement. However, the expert clarifies: “Even to use the TPI, France would have to meet fiscal conditions, and as of today, it does not fully meet them.”
Looking ahead to the evolution of the global economy in the coming year, the house's outlook points to three other disturbances aside from the increase in bond yields. The first is an energy shock that was initially considered temporary but is proving to be persistent. The second is the rise of artificial intelligence, a structural phenomenon that, however, is temporarily driving demand for energy, semiconductors, and land in a context of limited supply. The third is a fiscal shock, characterised by high deficits in developed economies despite the strength of the economic cycle. None of these disturbances seem close to resolution.
